Traditional Loans vs Purchase Order Financing: Which Is Better?

Man computing business financesTo grow, it may be inevitable for businesses to take out a loan, putting them in debt. A loan allows them easy access to money for capital growth or even effective debt management. They, however, don’t need to return it immediately. In the process, loans allow them to maximize their cash flow.

Today, companies already have several lending options, and each has its risks and incentives. These include purchase order finance, which is different from traditional loans in some ways.

Purchase Order Finance

Purchase order (PO) finance allows businesses to leverage their POs to deliver orders. In this situation, the business brings its PO to purchase order finance companies, which would fund it depending on the PO value. These companies are the ones that will pay the suppliers to allow the business to serve their customers despite being short on funds. In turn, PO finance companies collect interest and make sure they get their money back from the business. Some PO finance companies open a line of credit with suppliers for the business.

The average interest rate for PO financing is about 2% to 4%, which is significantly smaller than traditional business loans. The approval period is also shorter. In some situations, one may receive funding of as much as $10 million within five days. Typical business loans can take at least a month or two.

Traditional Business Loans

These are the types of loan banks offer. These come in different packages, which provide flexibility for the business. Unlike in PO financing, businesses can use the borrowed money for purposes other than supply orders. Businesses may buy equipment or pay more crucial debts. The payment terms of traditional loans are also very long. It’s not unusual to have a business loan that lasts for more than three years.

It’s not uncommon, though, for banks to require collateral. It can be challenging for start-ups since they don’t have a lot of assets, to begin with. Further, the approved amount may be lower than what the business needs. It can disrupt plans or compel the business to get additional financing elsewhere.

PO financing and traditional business loans have similarities, too. For example, they may need some form of guarantee in case of a default. The risks of getting rejected are also there. For those who want short-term loan solutions, PO financing is better. Traditional business loans are ideal for businesses that wish more extended time to raise repayments and ability to roll their money.